January 18, 2013

The risk for the banking system of what seems safe is always much higher than the risk of what seems risky.

Sir, in “Seeking high yields” subtitled “Central bankers should manage risk where it matters most” January 18 you write: “Macroprudential regulation…should ensure that the system is not put at risk by animal spirits. This function is not best-served by generic warnings against risk. There is nothing wrong with individual risk-taking if it does not threaten the system.”

Sir, have you ever seen a more generic warning against risk than what is imbedded in the capital requirements for banks based on ex-ante perceived risk?

Sir, how many times must I remind you of the fact that individual risk-taking never really threatens a system? Only a collective risk avoidance, that expresses itself in excessive exposures to what was ex-ante considered as absolutely safe but that ex posts morphs into being very risky does that.

Sir, again, for the umpteenth time, if you know that all bank crises have been caused by excessive lending to some of “The Infallible”, why on earth need banks to hold more capital when lending to “The Risky”, and as Basel regulations predicate?

“Central bankers should manage risk where it matters most”, indeed, and that is primarily where it is perceived to be absolutely safe!